Can Hong Kong’s first Smart City project win investors?

In Kowloon East, Hong Kong’s first Smart City is finally taking shape, three years after the government announced plans to develop the area into a ‘Second CBD’

May 10, 2019

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Denis Ma

Kowloon East, which includes the site of the former Kai Tak airport, is set to become a “vibrant, smart, sustainable” city-within-a-city and boasts high tech features such as multi-purpose lampposts that analyse air quality, display information and even charge electric vehicles.

The scheme is being managed by the Government’s Energizing Kowloon East Office and beyond luring landlords and tenants away from the current space-starved CBD, aims to cement Hong Kong’s place as a premier business hub with the use of people-centric and technology focused solutions.

“With Kai Tak, the government is effectively working from a clean slate, which allows for better and more comprehensive planning of infrastructure and services required,’ says Denis Ma, Head of Research for JLL Hong Kong. “By improving mobility, amenities and the built environment, Kowloon East will eventually be seen as preferred location to work, live and play.”

A number of pilot innovations are already underway in the once industrial district. They include an app that provides seamless outdoor/indoor navigation augmented with a VR platform; a smart crowd management system that automatically assesses pedestrian flows for crowd management and public transport arrangements; real time parking and traffic updates.

Smart = Investment-worthy?

Although the development is still in its early stages, several corporations have already moved in. Citibank consolidated five of its offices in Hong Kong and shifted to its own building in Kowloon East that was purchased for HK$5.42 billion back in 2014 and now boasts the likes of JP Morgan, AXA, Nike and Leo Burnett as neighbours.

Lower rents and value for money have been a big initial draw. Kowloon East offers significantly reduced rentals compared to Central, and tenants pay less to enjoy a Grade A building. On average, a tenant can save close to US$15 million a year in rent taking up a 100,000 square foot unit in Kowloon East instead of Central, according to JLL data.

But the price of land and assets in Kowloon East is now much higher than when the Smart City project was first announced. It was reported that local developer, Lai Sun Development, fended off 17 competitors to land a residential development site for HK$883 million last month. This worked out to be HK$13,300 per square foot and 60 percent more than what Wheelock and Co paid for a nearby site in 2016.

A slice of the pie for smaller businesses

The Smart City scheme also uses urban planning and management to support innovation and entrepreneurship for small businesses. Previously, some development sites in Kowloon East included restrictions around stratification. But sites sold more recently are dropping the clause, allowing developers to sell strata-titled units to small business operators and investors.

And due to the large concentration of industrial buildings, Kowloon East is one of the primary beneficiaries of the reintroduction of the industrial building revitalisation scheme last year. Older industrial buildings that meet certain criteria can be converted to non-industrial use without the need to pay a waiver fee or lease.

“With this, the government aims to provide a broader range of affordable office accommodation to the business community,” says Ma.

This has attracted developers like Hanison Construction Holdings, which purchased an industrial building in Kowloon East for HK$489 million in March.

Ma says that, while the Smart City development is a positive step for the city, the government needs to pick up the pace of change and be more flexible with its regulations so that Hong Kong isn’t left behind other cities in the region.”